BEEF COW SHARE
LEASE ARRANGEMENTS
James Oltjen,1 Daniel Drake 2
and Mark Nelson 3
of the cow herd operation with the
owner. Borrowing may still be required
for short term operating expenses.
Advantages of Leasing
Arrangements
1. Allows the operator to acquire
the use of resources without
making a direct monetary
investment in the assets.
Leasing arrangements between ranch
operators and cattle owners are being
used more in livestock production today
than ever before. Leasing has long
been used to acquire control of land,
but now it is being used with livestock.
It is used for a number of reasons—it
allows one with little capital to lease
cows and, perhaps, land as well; it
allows for intergenerational transfers of
the cow herd. Cow leasing is not new,
but there is relatively less historical
precedent compared to other agricultural leases. What is fair is still a
common question.
This publication discusses the practice
of leasing a cow herd. The owner of the
cow herd is referred to as the owner
and the party who leases the cow herd
is referred to as the operator.
2. Allows the risk and profit
associated with livestock
production to be shared.
3. Can provide a more efficient
use of resources (land, labor
and capital).
4. Can allow the owner to spread
the sale of a cow herd, and
avoid potentially large capital
gains.
5. Can allow the owner to convert
taxable income from “selfemployment earnings” to “nonparticipation income.”
Disadvantages of Leasing
Arrangements
Purpose of Leasing
Arrangements
Ranching requires control of large
amounts of capital if the operator is to
have adequate net income for a
comfortable living. It is difficult, if not
impossible, for ranch operators to
acquire adequate capital without
borrowing.
Leasing livestock is a form of acquiring
control of additional capital. However,
rather than borrowing this capital from a
bank or lending institution, the operator
borrows from another individual or firm.
The operator acquires the use of a cow
herd and shares the costs and returns
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1.
Both owner and operator give
up some individual control and
income earning potential.
2.
Takes more time, effort and
records.
3.
Could be difficult to prove that
the owner is not materially
participating.
“Cow Herd” Versus “Cow”
Leases
The first step in developing a lease
between two individuals is to decide
whether the lease is for a cow or a cow
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herd. For the purposes of this paper,
let’s define a “cow” lease as one where
no one furnishes replacements. The
lease, then is viewed as a single cow
lease, when the cow is culled, the owner
receives the income. When the entire
herd is sold, the lease is over. This type
of lease works well for producers who
wish to get out of business, yet spread
the sale of the cow herd over a period of
years. It also provides for ownership
transfer between generations.
A “cow herd” lease is viewed as an ongoing business arrangement whereby
the owner is responsible for providing
replacements. The replacements may
be purchased from outside the lease
arrangement, or can be raised within the
leased cow herd by the operator but
subtracted from the owners “share.” In
either case, the owner would receive all
cull income.
What Is a Fair Leasing
Agreement?
In developing a lease, owners and
operators want an arrangement that is
fair to both parties. As a rule, leasing
arrangements are considered fair if the
parties involved each receive approximately the same percent of income as
the percent of costs they contribute.
Bargaining may have an important
influence on the value placed on contributions.
Forms can be used to determine the
basic contributions of both owner and
operator. These are especially helpful
when working out a leasing arrangement for the first time. In such cases
there may be no past record of expenses involved in production.
Costs To Be Considered
There are two types of costs to consider when determining the amount that
each party contributes towards an
operation. These are fixed and variable
costs.
Fixed costs are incurred due to owning
property, and are often referred to as
ownership costs. Usually these costs
are called the DIRTI five - depreciation,
interest, repairs, taxes, and insurance.
It is assumed that these costs are
incurred regardless of operating levels
and returns.
Variable costs are incurred in day-today operations. In a livestock operation,
variable costs include feed, labor,
veterinary, drugs, trucking, and marketing, as well as miscellaneous costs.
These costs are sometimes called
operating costs.
In most leasing agreements, the owner
is responsible for fixed costs of the
livestock and perhaps for some variable
costs. The operator is generally responsible for most of the variable costs, and
may also furnish some fixed costs. In a
cash lease, the operator may pay the
owner cash rent equal to the owner’s
fixed costs.
Other Factors To Consider
Other factors besides fixed and variable
costs also need to be considered when
preparing a livestock leasing agreement. In the case of a cow herd, some
other factors include:
1. Who provides/pays the breeding bill?
2. Contingencies (e.g. drought,
death loss): how will they be
handled?
It is best if an owner and operator can
work together in determining their
respective contributions. They might
work independently at first; then they will
be better prepared to resolve any
differences.
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3. Who makes which management decisions (e.g. culling,
sale time)?
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4. The lease itself: length, renewability, termination?
5. How is income divided?
6. How will price be set if one
party purchases the other’s
share?
Determining Sharing
Arrangements
Three things need to be determined for
an equitable leasing arrangement.
These need to be done by the operator
and owner working together:
each party may be set based on
historical costs. In such cases, validation of the proportions with current
records is important.
Consider these estimates (Example 1)
valid only under the costs, production
level, and prices specified. Individuals
or groups using the information provided should substitute costs, production levels, and prices valid for the
locality, management level to be
adopted, and marketing circumstances
for the location and time period involved.
Variable Expenses
1. Determine the costs to be
considered.
2. Determine the contributions of
each party.
Feed
1.
Pasture is a feed cost. If the
pasture is owned by the party
providing it, the pasture cost
could be a reasonable rate of
return (2 to 6 percent) based
on its value, or it could be the
amount for which it could be
rented to someone else. If
the pasture is rented by the
party providing it, then his
contribution is the actual
cash rent.
2.
Supplemental pasture in the
form of crop or pasture
residue or other grazing is a
contribution towards feed
costs and credit should be
given to the party who
provides this feed.
3 & 4.
Hays are considered as feed
costs and should be valued
at market prices.
5.
If grain is used in the operation, value at market price.
6.
Protein, mineral, and vitamins are valued at market
price. These items should be
furnished by the same party
3. Determine the percent of costs
contributed by each party.
When these three factors are determined, the operator and owner should
share in income in the same proportion
as they contribute to the operation.
Evaluate the leasing agreement
occasionally to assure an equitable
arrangement over time. Fluctuating
prices and management changes can
cause the proportion of the contributions to shift over time.
Costs for a Cow Herd
A worksheet (Table 1) can be used to
estimate the various costs involved in
the operation of a cow herd. The
amount each party contributes can be
credited to the party making the contribution. A short explanation of each cost
item may help in arriving at an equitable figure.
When historical costs are well documented, proposed new contributions by
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1996
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who provides hay and forage
so there will be no conflict
concerning rations.
Other Expenses
7 - 11.
Other expenses should
include the costs of the cow
herd. For example, the cost
of operating capital for the
operator may be a significant
expense. Sources of information include tax returns and
detailed financial analysis
(e.g. SPA, FINPACK).
12.
Labor is a contribution of the
party who provides it. If labor
is hired, its cost is the actual
cost to the party who pays for
it. If labor is furnished by one
or both parties, then labor
should be valued at the
current cost of labor as
though it had to be hired.
Labor required per cow per
year will vary with the size of
the herd. For herds of less
than 30 cows, 10 to 15 hours
per cow per year may be
required. Large herds will
require 5 to 6 hours per cow
per year. Use actual costs, if
available.
13.
Fixed Expenses
Cows and Bulls
14.
Interest on cows as an
investment contribution of
the owner. The interest rate
used should be the approximate interest rate that could
be earned if money were
invested in other alternatives. If interest rates are 5
percent and the average
value of a cow is $600, then
the annual contribution of
the owner is 5 percent of
$600 for 12 months or $30.
Cow value for one-year
leases is her market value
minus capital gains taxes;
for longer term leases it is
balance sheet value (a
conservative base value or
cost less depreciation).
15.
Depreciation on cows is a
contribution of the owner
because he is responsible
for providing replacements.
It is the difference between
the value of the cow when
she is placed in the herd
and her salvage value when
she is removed from the
herd. To arrive at annual
depreciation, divide this
figure by the number of
years the cow is expected to
remain in the herd. If a cow
going into the herd is valued
at $600 and you expect her
to be worth $350 when she
is removed from the herd in
7 years, then annual depreciation is $600 minus $350
divided by 7 or $35.71 per
cow. Depreciation is also a
contribution of the owner in
the typical “cow” lease
arrangement, because the
cow is usually worth more at
the beginning of the lease
than she will be when culled.
Management of a cow herd
should be the responsibility
of both parties. The owner of
the cow should decide which
cows to cull and the operator
should be responsible for the
day-to-day decisions involved
in managing the cow herd to
produce optimum returns.
Placing a dollar figure on the
value of good management is
difficult, but no other factor is
more critical when determining overall cow herd profit.
Helpful guides include 5 to 8
percent of gross income or 1
to 2 percent of total capital
managed.
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16.
17.
Death loss of cows should be
considered a contribution of
the owner. Death loss is
usually computed at 1 to 2
percent of the value of the
breeding herd. There should
be contingencies written in
the lease for cases where
actual death losses are
greater than the percent used
in the lease worksheet.
18 & 19. Annual interest and depreciation on bulls are determined
the same as for cows (items
14 & 15) except bull value is
estimated by dividing bull
cost by the number of cows
serviced. This determines the
amount to charge against
each cow.
Buildings and Equipment
20 & 21. Interest and depreciation on
buildings and equipment
used in the operation is a
contribution of the party who
owns the buildings and
equipment. Again, figure the
interest on the value of the
buildings and equipment
according to an interest rate
that approximates investment
returns. Depreciation is the
decrease in the value of the
property in a year’s time.
22.
the current value of buildings
and .5 to 1 percent of the
current value of livestock
equipment.
Insurance on livestock will
usually be about .1 to .25
percent of the value of the
breeding herd. Bull value is
estimated by dividing its cost
by the number of cows
serviced, e.g. $2,500 ÷ 25
cows/bull = $100.
Taxes and insurance on
buildings and equipment is
the cost for taxes and
insurance incurred against
property used for livestock
during the year. This will
amount to 1 to 1.5 percent of
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Determining Contribution of
Each Party
After it has been determined which
costs each party contributes, list these
amounts in the appropriate column on
the worksheet. The totals of the owner
and operator columns will show the
total contribution of costs for each
party.
These totals might make both parties
concerned as to the profitability of the
cow herd operation. This is the risk that
each party assumes. If returns per cow
exceed the value of all contributions,
then each party will get full value of all
contributions. If contributions are
greater than the returns, then each
party will not receive full value of his
contributions. However, this does not
mean that each party does not benefit
from the operation. There are benefits
such as capital gain advantages, way
of life, and pride of ownership realized
by the owner. There may also be
advantages in the use of otherwise
unsalable feed and in the use of offseason labor for the operator.
Determining Percent Contributed
by Each Party
As illustrated in Example 1, a simple
way to calculate the percent contributed
by each party is to separate the total
contributions into the amount contributed by each party and then divide by
the total contribution.
In Example 1, the owner receives
22.07% of the calf crop and all of the
cull income from sale of cows (7 year
life, 100 cows ÷ 7 years = 14.29 cows/
year) and bulls (6 year life, 100 cows ÷
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25 cows/bull = 4 bulls, 4 bulls ÷ 6 years
= .6667 bulls/year). If 100 cows had
been exposed to a bull and a 85% calf
crop was weaned, the owner would
receive:
85 calves (550 lb. @ $.90/lb.) x .2207
14.29 cull cows (@ $350)
.6667 cull bulls (@700)
9,285
5,000
467
$14,752
In addition it is important to note, the
owner would be responsible for replacing the 14.29 culled cows, the 1 dead
cow (100 cows @ 1% death loss), the
.6667 culled bulls, and the .04 dead
bulls (4 bulls @ 1% death loss).
The operator would receive 77.93% of
the calf crop:
85 calves (550 lb. @ $.90/lb.) x .7793 $32,790
Profit or Loss?
In this example, the operator’s costs
are $31,930 ($319.30 x 100 cows),
resulting in a profit of $860 ($32,790 $31,930).
The owner’s calculated costs from
Example 1 are $9,041 ($90.41 x 100
cows), but his total estimated expenses
include replacing the cull animals since
he is providing the cow herd. These
expenses are $14,508 which include
replacing the salvage value of what
was sold ($5,467). His out of pocket
expenses are:
15.29 replacement cows @ $600
.7067 bulls @ $2,500
Total other costs of $35.70
X 100 cows
9,171
1,767
3,570
$14,508
The $35.70 per cow cost is $30 interest
on cows + $5 interest on bulls + $.70
insurance. The owner’s net result is a
profit of $244 ($14,752 - $14,508).
Another way to consider or check profit
Ranch Business Management
is to exclude cull and death income and
expenses. Then the owner would have
an income of $9,285 and expense of
$9,041 for a net gain of $244.
Thus, each party receives the same
proportion of net returns as they
contribute in costs. Total returns are
$42,075 (85 calves x 550 lb @ $.90/lb);
total costs are $40,971 ($409.71/cow x
100 cows). Total net returns are thus
$1,104 ($42,075 - $40,971). The
operator nets $860, or 77.93% of
$1,104; the owner nets $244, or
22.07% of $1,104.
Accounting Procedures for Raising
Replacements Within the Cow Herd
When the owner is furnishing replacements to replenish the cow herd, and
they are selected and raised from the
calf crop, the value and cost to raise
these replacements must be subtracted
from the owner’s share. In Example 1,
the owner’s share of income could be
amended to include the value of the
replacements:
Income
85 calves (550 lb. @ $.90/lb.)
x .2207
14.29 cull cows (@ $350)
.6667 cull bulls (@700)
Costs
15.29 replacement heifers
(550 lb. @ $.90/lb.)
Growing phase cost estimate,
pay to operator
.7067 bulls @ $2,500
Total other costs of $35.70
X 100 cows
Amended Income
9,285
5,000
467
$14,752
7,566
2,136
1,767
3,570
$15,039
(-$287)
The costs to grow the replacement
heifers from weaning age to 15 months
for breeding is estimated by using a
monthly charge (based on the annual
cost per cow adjusted to 3/4 of an
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animal unit) times the number of
months from weaning to breeding age
(3/4 X 15.29 females X $319.30 annual
cost / 12 months X 7 months). In the
example, heifers are weaned at 8
months of age and grown for 7 months
before reaching breeding age at 15
months. Specific growing period costs
should be used when available.
If additional replacements are saved for
later culling, their costs and cull income
would be assigned to the owner.
In the above example, from a strictly
out-of-pocket cash basis, raising
replacements is clearly less profitable
compared to purchase of breeding age
females. The additional cost is $1,136
($7,566 + $2,741 - $9,171). However,
long-term genetic gains, improved
animal health, and pride of ownership
are possible offsetting benefits, which
may also improve income from future
calf and cull sales.
In the event the owner purchases
replacements of under-breeding age,
growing costs from purchase until
attainment of breeding age should be
assigned as in the example above.
Conclusions
The methods described in this publication are not the only ones available, but
these are accepted as fair for the
assumptions stated. Other lease
options available include cash leases,
fixed percent of calf crop, and lease
with the option to buy. In all cases,
records are important to both establish
a lease, as well as to evaluate it
through time. Current estimates and
projections are needed to adjust the
lease as described above, and historical analyses allow one to factor risk
and temper any changes. Communication and negotiation between the two
parties is important for keeping this
form of lease equitable.
For Further Reading
Bennett, Myron. 1979. Livestock-Share
Rental Arrangements for Your
Farm. North Central Regional
Publication 107.
Erickson, Lorne, Merle Good, and Bill
Heidecker. Negotiating Cow
Lease Arrangements. Farm
Business Management Branch,
Alberta Agriculture.
Feuz, Dillon, Norman L. Dalsted, and
Paul H. Gutierrez. 1990.
Leasing Cows — What is
Equitable. Journal of the
American Society of Farm
Managers and Rural Appraisers 54:21-28.
Robb, James G., Daryl E. Ellis, and
Steven T. Nighswonger. 1989.
Share Arrangements for Cowcalf or Cow-yearling Operation:
COWSHARE a Spreadsheet
Program. Nebraska Cooperative Extension, CP-2. University
of Nebraska, Lincoln.
Livestock Specialist1
Animal Science Dept.
University of California, Davis
Livestock Advisor2
Siskiyou County Cooperative Extension
University of California
Livestock Specialist3
Cooperative Extension Service
Kansas State University
Ranch Business Management
1996
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Example 1. Beef “Cow” Lease or “Cow Herd” Lease with replacements
purchased outside the arrangement ($/cow).
Total
Contribution
Variable Expenses
FEED:
1. Pasture
2. Crop residue pasture
3. Hay: ________________
4. Hay: ________________
5. Grain
6. Protein, minerals and vitamins
OTHER EXPENSES:
7. Veterinary and drugs
8. Fuel, oil and utilities
9. Repairs and supplies
10. Marketing and trucking
11. Miscellaneous:
operating capital
12. Labor
7 hrs @ $6.00 /hour
13. Management
475.42 gross income/cow @ 5 %
Fixed Expenses
COWS AND BULLS:
14. Interest on cows
600 @ 5 %
15. Depreciation on cows
( 600 - 350 ) / 7 years
16. Insurance on herd
( 600 + 100 ) @ .1 %
17. Death loss
( 600 + 100 ) @ 1 %
18. Interest on bulls
100 @ 5 %
19. Depreciation on bulls
( 2,500 - 700 )/ 6 years/ 25 cows
Operator’s
Share
$ / cow
82
16
90
82
16
90
5
5
$ / cow
7
11
9
6
4
42
7
11
9
6
4
42
23.77
23.77
$ / cow
30
30
35.71
35.71
.70
.70
7
5
7
5
12
12
BUILDINGS AND EQUIPMENT:
20. Interest on buildings and equipment value
230 /cow @ 5 %
21. Depreciation on bldgs. and equip. ($/cow)
22. Taxes & insurance, bldgs. and equip.
120 @ 1.25 % + 70 @ 0.75 %
11.5
10
TOTAL CONTRIBUTIONS (sum of lines 1-22)
409.71
$ / cow
11.5
10
2.03
PERCENT OF TOTAL CONTRIBUTIONS
Ranch Business Management
Owner’s
Share
1996
2.03
90.41
319.30
22.07 %
78.93 %
120
Table 1. Fill in values in the worksheet to evaluate possible arrangements ($/cow).
Total
Contribution
Variable Expenses
FEED:
1. Pasture
2. Crop residue pasture
3. Hay: ________________
4. Hay: ________________
5. Grain
6. Protein, minerals and vitamins
Owner’s
Share
Operator’s
Share
$ / cow
OTHER EXPENSES:
7. Veterinary and drugs
8. Fuel, oil and utilities
9. Repairs and supplies
10. Marketing and trucking
11. Miscellaneous:
operating capital
12. Labor
hrs @ $
/hour
13. Management
gross income/cow @
%
Fixed Expenses
COWS AND BULLS:
14. Interest on cows
@
%
15. Depreciation on cows
(
)/
years
16. Insurance on herd
(
+
)@
%
17. Death loss
(
+
)@
%
18. Interest on bulls
@
%
19. Depreciation on bulls
(
)/
years/
cows
BUILDINGS AND EQUIPMENT:
20. Interest on buildings and equipment value
/cow @
%
21. Depreciation on bldgs. and equip. ($/cow)
22. Taxes & insurance, bldgs. and equip.
@
%+
@
%
$ / cow
$ / cow
$ / cow
TOTAL CONTRIBUTIONS (sum of lines 1-22)
PERCENT OF TOTAL CONTRIBUTIONS
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1996
%
121
%
FROM:
California Ranchers' Management Guide
Steven Blank and James Oltjen, Editors.
California Cooperative Extension
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Ranch Business Management
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